NEL Holdings South Ltd Management Discussions.

Socio Economic Environment

Covid 19 has significantly affected the global Economy leading to the disruption in operations and supply chains across the world. Although vaccination has raised hopes of a turnaround in this pandemic, renewed waves and new variants of the virus pose concerns for the outlook. As per IMF (International Monetary Fund), amidst exceptional uncertainty the global economy is projected to grow at 5.5% in 2021 and 4.2% in 2022. RBI considers the Indian economy to be fragile- a weaker state takes longer to recover from shocks and catch-up to where it was before the pandemic.

Real Estate Market Indian Real Estate Market

Real Estate sector in India is expected to reach a market size of US$ 1 trillion by 2030 from US$ 120 Billion in 2017. Retail, Hospitality and commercial sector are also growing significantly providing the much-needed infrastructure for Indias growing needs. In India, Real Estate Sector is the second highest employment generator, after the agricultural sector

With series of reforms, such Real Estate Regulation & Development Act (RERA), FDI relaxations, there has increased transparency in real estate transactions thereby attracting foreign investments in the sector. Driven by increasing transparency and returns, there is surge in private investment in this sector. Indian real estate attracted US$ 5 billion institutional investments in 2020, equivalent to 93% of the transactions recorded in previous year.

With increasing focused demand of data centres, Real Estate Sector is expected to have increased potential of 15-18 million square feet by 2025.

Government of India along with Government of respective states has taken several initiatives to encourage development in the sector. The Smart City project, with a plan to build 100 smart cities, is a prime opportunity for real estate companies.

Bengaluru Real Estate Market

Bangalore has been one of the better performing residential real estate markets in India and having said this, Bangalore too has not been able to escape the bearishness in real estate market over the last few years with the prices being range bound and not increasing significantly year-on-year. The investor interest has been limited due to lack of capital appreciation and end use preferences also being more towards apartments nearing completion has been a challenge for many developers more so in launching and getting the new projects running. The affordable and mid-segment offerings have been doing relatively better than luxury sales However, the New Sales in Bangalore have improved over Q3 and Q4 of FY20-21 as compared to Q1 and Q2 of FY 20-21 but are still to match the Pre- Covid levels. The arrival on second wave in Q1 FY21-22 has also affected the performance and slowed down the impetus.

A significant amount of buyers in Bangalore were from IT background and companies extending Work From Home indefinitely without hampering productivity have allowed a lot of people to return to their hometowns and this movement has put pressure on real estate demand for buying as well as for rentals. People spending more time at home and saving has slightly helped in improving budget of people for buying and preference in terms of buying larger units to allow and facilitate Work from Home for the working class.

While the inventory hangover in Bangalore is significant, it is still less compared to many other Metro Cities / Tier 1 Cities. Top listed developers have also been launching new offerings in the recent quarters although with caution and conservatively when to the historical trends and they have seen good response from the market, which has added some positive sentiment for the market revival. However, the sales velocity has been slow because of which new inventory adding up to existing unsold inventory has resulted in an inventory overhang of around 3-4 years, even with limited new launches, which is significant. This is expected to put pressure on developers in terms of pricing in coming quarters more so in want of liquidity and funds to move the projects. New launches are further expected to pick up on H2 of FY21-22 after assessing possibility of Third Wave of Covid and its possible impact.

While worries of inflation / recession / economic downturn may have made people be cautious in terms of their planning and budgeting for buying a house, the increased hiring and increments being rolled out to the employees by the IT companies may help in driving the sales in future along with hope of IT companies resuming work from office soon leading to all the outstation employees to return back to the city. The insufficient infrastructure of the city to support the growing demand and development remains a concern with troubles like traffic and water supply looming over and initiatives of government are expected to assuage these concerns.

Coming to office and commercial spaces, Bengaluru has been one of the best performing office real estate market in India in recent years but it has been under strain since the pandemic started. While there was some momentum seen in the first quarter of 2021, the second covid-19 wave in the April-June quarter saw much of it eroded. For now, most IT/ITES companies have extended the WFH option for now and are waiting for things to change in favour of the previous status quo. With significant dependency on IT and ITES for commercial occupancy and with several leases coming for renewal in 2021-22, the year would be challenging and defining for commercial real estate market in Bangalore depending on decisions of the companies who operate their office spaces on lease rental model and the course of COVID pandemic. However, Bangalore hopes to ride this challenge given active hiring by companies and expected gradual return of employees to office spaces, which will give way to renewal of leases, new demand and continued growth.

The allied upcoming real estate sectors of Warehousing and Data Centres are promising categories with High Growth projected for the coming decade given Indias Growth and Consumption Story and Bangalore being the Silicon Capital of India. Warehousing industry in major cities is expected to grow at a healthy rate of 20-25% CAGR over the next 5 years subject to certainty and resolution of COVID pandemic with outskirt corridors of Bangalore offering great opportunities for this asset class

The Company

Company Overview and Market Positioning

NEL Holdings South Limited ("NEL" or "Company") is an integrated property developer with presence in multiple asset classes: Residential and Commercial. The Company has a very strong brand equity, business processes and partnerships to attain the next stage of growth. Since inception, the Company has completed many projects across residential, commercial and hospitality segments.

The Company is working towards reducing our exposure in residential market and so there are not any residential new launches planned. The Company is working on exiting of several of our existing residential projects with aim of monetising and deleveraging our books. There are a few residential projects / plotted developments, which the Company, aim to complete given its obligation towards the existing buyers in those projects

NEL has a comprehensive corporate governance framework with an eminent Board and strong management team with significant experience across industries. In line with best in class corporate governance practices, the Company has a high proportion of Independent Directors.

Operational Performance

During the year, the business was significantly impacted due to Covid 19 The Company is planning to diversify its business and expand its business opportunities in new areas of business like providing manpower for facilities management business, securities business and other service oriented businesses in the future.

Financial Performance in IND-AS (Figures)

NEL generated revenue of Rs. 3519 Million, compared with FY 2020 revenue of Rs. 523.70 Million. The Earnings before interest, tax, depreciation and amortization (EBITDA) was Rs. 4.09 Million As compared to Rs. (-) 6776 Million in the previous year. The Profit / (Loss) after taxes during the year was Rs. (20382) Million.

During the year, Company has exited 4 projects and corresponding revenue has been recognized.

Revenue Breakup: - IND-AS (Figures)

Rupees in lakhs FY2021 % share FY2020 % share
Property Development 3,495 28.00 4,069 97.70
Contractual Activities / Other Operating Income 0 0 0 0
Income from Sale of Projects 8,895 71.26 0 0
Maintenance Income 92 0.74 96 2.30
Lease Rent 0 0 0 0
Misc. - Other Income 0 0 0 0
Total 12,482 4,165

Financial Condition IND- AS (Figures)

(Rs. in Lakhs)

Particulars March 31, 2021 March 31, 2020
Sources of funds
a. Shareholders funds (99,234) (74,559)
b. Minority Interest - -
c. Loan funds 72,587 1,01,678
Total (26,647) 27,119
Application of funds
a. Fixed assets (net) 8,903 13,905
b. Investments 1,008 1,008
c. Net current assets (36,677) 4,215
d. Deferred tax/ miscellaneous expense, among others 119 7,991
Total (26,647) 27,119
Particulars 12 months ended March 31, 2021 12 months ended March 31, 2020
Profit before tax (12,671) (77,592)
Add: Adjustments 23,164 73551
Add: Net working capital 33,189 9,401
Less: Income Tax paid (1569) (73)
Net cash flow from operating activities 42,113 5,287
Net cash flow from investing activities (1) 4,103
Cash flow from financing activities (42,130) (9,564)
Net cash inflow / (outflow) (18) (174)

Liquidity

As of March 31, 2021, the Company had cash and cash equivalents of Rs. 1,22,12,000/-. On a standalone basis, the Company had a total debt of Rs. 355,86,00,000/- and the net worth was at Rs. (-) 898,05,06,342/-. The Company is closely monitoring the debt levels and plans to reduce the high cost debt from the cash generated from on-going projects and exiting some non-core assets in the portfolio from time to time.

Business Strategy

Complying with Real Estate Regulation and Development Act

With introduction of RERA, the Company has geared up its internal processes for becoming compliant with the requirements of RERA. Revenue diversification and expansion of rental income

NEL has been strategically focused on diversifying its revenue to include recurring income stream by venturing into leasable office spaces. These are long term investments with a longer gestation period. The Company intends to expand its rental revenue in next 5 years. With higher landowner expectations, tough liquidity situations, increasing costs with tightened margins, company is carefully evaluating proposals to find feasible options.

Exploring new opportunities

Warehousing: With the boom in the 3PL and e-commerce players adopting organised warehousing and taking up warehousing spaces, organised warehousing is gaining traction in the Indian market. To cater to this demand from e-commerce and supply chain players, we will develop a portfolio of warehousing assets in the next 5 years. Our first set of warehouses will be coming in Bangalore and Chennai.

Facility Management : Having gathered experience of Property Management by way of operation of its subsidiary LOB Property Management Private Limited, which was/is catering to the Facility Management services and requirements of completed projects of NEL Holdings Ltd and its other subsidiaries, we see great potential in the business of Property Management services where there is need for quality professional players to provide integrated management solutions including security, housekeeping, MEP maintenance, landscaping and external development management, capex improvement, etc. It is a competitive but booming sector wherein there is great demand in several residential and commercial spaces for branded maintenance services / companies. While the margins are modest, increased scale would provide economies in terms of cost efficiency and improved margin apart from helping the topline. NEL intends to develop this vertical / arm in future by bidding for and managing more projects across Bangalore, not just limiting to NEL Holdings portfolio of completed projects. This would help in related diversification by utilizing existing resources and capacities.

Selective geographic expansion

The Company believes that deep insights into the community and clientele and a thorough understanding of the policies, priorities and processes of the local Government are essential factors that drive success. In line with this belief, NEL has chosen to operate in the South Indian market. Majority of the ongoing and upcoming projects are located in Bengaluru, where the Company has strong experience of executing several projects since its incorporation. Furthermore, Bangalore is considered to be one of the best real estate markets in India. NEL is also selectively pursuing opportunities in other southern cities such as Chennai, Kochi and Goa.

Managing and promoting talent

NELs culture is focused on customer-centricity, collaborative team work, result orientation, entrepreneurial mind set and developing people. One of the key growth strategies at NEL is to manage and promote talent by providing growth opportunities, rewards, respect, learning and fun. The Companys employees are both an important stakeholder group and key players in its business. With their skills and achievements, the Company is driving a culture of innovation and sustained growth for NEL.

Investment in systems and technologies

Information Technology continues to support all aspects of business and operations at NEL through continued investment in enterprise wide SAP platform including data analytics.. The Company continues to explore and implement new emerging technologies for furthering business objectives. IT forms the core of all communication and information exchange for ongoing monitoring and effective decision-making.

Opportunities and Threats

Demand for residential real estate has increased with rapid rise in urbanization. Millions of people migrate to cities every year, not only driving demand for homes but also giving rise to demand for commercial and retail spaces. The benefits to the economy, commonly termed as the demographic dividend is benefitting the real estate sector. There are growing requirements of space for sectors such as education and healthcare. Implementation of Real Estate Regulation and Development Act (RERA) has helped bring in more transparency to the real estate transactions and boosted buyers confidence. The disposable income has been steadily increasing and there is easier availability of consumer finance coupled with a declining interest rate trend. All the aforesaid aspects result in opportunities in all segments of real estate.

The key threats to real estate business emanate from the cyclicality of the business owing to the tide and ebb in consumer and business confidence. Going forward, with the e-commerce market in India making itself look attractive, can pose a serious threat to the retail real estate. Other immediate challenges to the business are from:

• Environmental risks such as depletion of water table

• Potential impact of Covid-19 resulting in delay of construction activities and negatively influencing market sentiments

• Sales market risks - Economic and market conditions might influence customers to defer or cancel their home purchase decisions

• increase in cost of commodities and building materials

• Land related risks

• increase in interest rates which could result in depressed demand from customers and at the same time increase our Interest burden

• shortage of labour and skilled technical manpower and the consequent upward pressure on cost of human resources

• Risk of legal disputes

• Inflation and exchange rate risks

• regulatory and policy changes results in higher costs and delays in approvals related with projects Risk management

The Company has an established enterprise risk management framework to optimally identify and manage risks, as well as to address operational, strategic and regulatory risks. The ability to anticipate risks and respond effectively is critical for achieving the Companys objectives and provides value to stakeholders. The risk management process also addresses long term strategic and operational planning, talent acquisition and retention, treasury management, financial reporting and controls, information technology and security, environment health and safety compliance, legal, taxation, communication, regulatory compliance and code of conduct for employees. The Company believes that risk is an integral part of every business and promotes a culture of building ability to anticipate and manage the risks effectively and converting them into opportunities. Risk assessment is conducted by the risk management committee and the program is reviewed periodically by the Audit Committee.

There are several areas of risk related with:

• the macroeconomic environment

• Regulatory risks - laws governing the acquisition, construction and development of land

• Land title and ownership risks

• the information technology systems and disaster recovery

• the project management resulting in deviation from planned time, quality, cost and safety

• the availability and cost of building materials

• Liquidity risks

• the availability of finance and the cost of financing

• the human resources - their availability, costs and compliance with the code of ethics of the Company

• the vendors and business partners

• the assets of the Company

• Competitors and Customer risks

Internal Control Systems

NEL has an elaborate internal control system which monitors compliance to internal processes. It ensures that all transactions are authorized, recorded and reported correctly. Well established and robust internal audit processes, both at business and corporate levels, continuously monitor the adequacy and effectiveness of the internal control environment across the Company and the status of compliance with operating systems, internal policies and regulatory requirements. In the networked IT environment of the Company, validation of IT security continues to receive focused attention of the internal audit. The Internal Audit team of the Company independently evaluate the adequacy of internal controls and concurrently audit the majority of the transactions in value terms. Independence of the audit and compliance is ensured by direct reporting to the Audit Committee of the Board.

In order to ensure compliance with the Companys Act related with Internal Financial Control (IFC), the Company appointed KPMG to carry out a study on the processes of the Company and suggest remedial measures if any. Certain process changes were instituted and KPMG reported that the Company is compliant with the requirements of IFC. For the subsequent periods, internal audit has been mandated to specifically carry out audits with respect to the compliance with IFC requirements.

The Company strives to continuously strengthen the internal control systems by adopting standard operating procedures and by delegating roles and responsibilities to various Department heads for effective implementation of the same. This is to ensure that the Company conducts its business with highest standards of statutory, legal and regulatory compliance.

Outlook

In recent years, Indian real estate industry has witnessed the biggest policy changes like GST and RERA. The long term outlook remains attractive due to economic growth, increasing urbanization, employment opportunities, affordability, favourable demographics, urbanization, and preferred location by NRIs, expats and IT/ITES professionals. Further, income tax benefits, lower interest rates and availability of financing options support the growing demand. Management would adopt a cautious approach and observe the developments closely while making decisions. The key focus for us in the following year would be:

• Focus on execution and revenue recognition: There are 10 residential projects currently in execution having a developable area of 4.3 million sq ft. There are another 4 residential projects having a developable area of 2.45 million sq ft which are in various stages of design and approval and are targeted for launch during the coming quarters. This represents a huge growth in the intensity of the business and correspondingly on the revenue and profits of the Company. We are now focused on staying ahead on the cash collection cycle and accelerate execution. The consumers are highly discerning and the market is competitive. For success in the market place timeliness and quality of delivery are the differentiators.

• Compliance with RERA: The Company has been focusing on operational changes to be compliant with RERA. The process includes identification of process which has to undergo change, modification and roll out Standard Operational Procedure (SOP) to be compliant.

• Design and Innovation: The Company has always focused on building a strong brand recall and differentiating itself from the competitors by continuous investments in new design and innovation for projects. Our association with leading firms like KPF, WATG and others help us develop projects which provide our customers a unique living experience.

• Cash-flow Management - Tight control on accounts receivables and accounts payables with the objective of reducing the interest burden.

• Customer Relationship - Enhance customer experience at each of their touch points starting with at the stage at which we interact with them to assist in selection of a home till the time it is handed over.

Human Resources Development

• NEL employs people across all functions. The Company continues to foster a high performance culture by recognizing good performers and providing them with career enhancing opportunities. Several HR initiatives have been taken for the strategic alignment of the HR function with the business objectives. These initiatives encompass employee engagement, learning & development besides improved internal communication mechanism with employees. With current slowdown, we have consolidated and optimised our resources for effective and productive growth with minimal required resources.

• Our registered and corporate office is located in Bengaluru. This houses employees who oversee our financial, administrative, design and planning and other reporting functions. We have not experienced any material strikes, work stoppages, labor disputes except for the national lockdown imposed due to Covid wherein business operations continued as Work from Home.

• For the development of some of our projects, we also engage third party consultant engineers, architects, interior designers and landscape designers. In addition to our employees, we also engage the services of contractual workers which include tradesmen, car drivers, housekeeping personnel and other skilled, unskilled and semi-skilled workers. Our consultants, contractors and subcontractors who work on our projects also employ a significant labour force.

• Our work-force consists of our permanent employees, consultants and labour work force that work at projects through subcontractors.

Cautionary Statement

Statements in this Management Discussion and Analysis contain "forward looking statements" including, but without limitation, statements relating to the implementation of strategic initiatives, and other statements relating to NELs future business developments and economic performance. While these forward looking statements indicate our assessment and future expectations concerning the development of our business, a number of risks, uncertainties and other unknown factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, general market, macro-economic, governmental and regulatory trends, movements in currency exchange and interest rates, competitive pressures, technological developments, changes in the financial conditions of third parties dealing with us, legislative developments, and other key factors that could affect our business and financial performance. NEL undertakes no obligation to publicly revise any forward looking statements to reflect future / likely events or circumstances.

For and on behalf of the Board of Directors
Nitesh Shetty
Place: Bengaluru Chairman & Managing Director
Date: June 29, 2021 DIN:00304555